What Is an Activity Cost Estimate?
Need a dependable way to calculate the cost of a project? Begin by estimating the costs associated with performing or completing each work activity. It can feel like a monumental undertaking; however, there’s no better way to accurately project budgetary requirements.
Activity cost estimates help reduce cost uncertainty because they break down project costs to the smallest level, the activity level. By starting with the smallest level of work, the project manager creates a granular decomposition of cost that is later rolled up to higher levels to create the project budget.
An activity cost estimate includes those costs associated with all the resources required to complete the activity. The various types of costs might include direct and indirect costs associated with labor, materials, equipment, services, facilities, exchange rates, inflation and allowance.
Generating activity cost estimates isn’t always an exact science. Assumptions are made, prices may fluctuate and the available resources may change. Because uncertainty exists, it’s a good practice to retain supporting details of how the estimates were developed. Later, the information will be referenced when performing risk identification.
Who Creates the Activity Cost Estimates?
The cost of activities are estimated by the person responsible for determining the project funding requirements. Most often, that person is the project manager.
What Are the Inputs?
If we’re to estimate the cost of project activities, we must know what the activities are and what resources are required to perform or complete those activities. This means that an activity list and a resource requirements list are inputs to estimating activity costs. Other inputs may include sources and documentation that support how each estimate is reached.
How Are They Used?
Activity cost estimates are building blocks for creating the project budget. First, the activity cost estimates and the associated contingency reserves are added together or “rolled up” into work package cost estimates. The work package estimates and the contingency reserves are then aggregated into control accounts. The sum of all the control accounts makes up the cost baseline for the entire project. Finally, management reserves are added to the cost baseline to determine the project budget.
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